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The only new BLOG I posted
towards the end of the year had some comments on Apple Computer (NASDAQ:
AAPL), and that was it for the vacation week. The first three trading
days of 2008 have been very rough on the markets, with Friday being a "cash
at any cost" blood bath. The "R" word was bandied about on Friday as the
jobs report came very anemic.
I bought APPL calls on Friday,
and posted a BLOG about the trade. The stock has been decimated
in the first three days of '08. Read Friday's BLOG for details on
which calls. These irrational, non-company driven sell offs often end up
being great buying opportunities, especially for traders. It just takes
the 2 C's: Courage, and Capital. For AAPL, next week you have the
annual Consumer Electronics Show followed by the annual MacWorld
Report one week from Monday. Traders, have at AAPL on the long
side in my view.
As 2008 progresses, new stories will
unfold, and older ones will either make progress or fall by the way side.
This edition has information about the microcap world no on else is providing
to investors.
The BLOG is your opportunity
to ask questions and offer comments. I will make an effort to answer every
legitimate question. If I don't know the answer, I will contact the management
and get the answer. Alternatively, if you have questions you don't want
publicly displayed, you can always email me directly at editor@otcjournal.com.
If you submit a comment or question, it will not appear on the site until
I have responded.
To use the BLOG, simply go
to the home page at www.otcjournal.com
- the BLOG scrolls down from the upper right hand corner. The most
current journal entries appear on the right hand side of you screen. Check
back frequently for updates particularly when stocks are moving to overbought
or oversold levels in volatile markets.
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The SEC Helps
U: New '08 Regs Change the Micro Playing Field |
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2007 is over. It was a good
year for the OTC Journal- not a great year, but definitely a good
year. It would have been a great year if Santa had come as he usually does.
Alas, Santa came up short this year thanks to the sub-prime tail spin which
began in mid November.
There were only a couple of big losers
as there will be every year: NCNC comes to mind, along with UCMT
and a false start in ENGM. Former super star CPNE gave back
all its huge gains from early in the year, and EFSF continues to
suffer from the awesome burden of permanent potential.
On the "Treading Water Side" NIHK
came in with a lackluster performance in the 2nd half of '07 along with
PNWIF-
I have high hopes for both of these ideas in 2008 unless the "R" word keeps
investors out of stocks.
On the plus side- SPKL was
a huge win for OTC Journal members, along with AAPL. CREE
had
its moments. TTGL was a big winner up until the last month, but
look for a big year in 2008 out of that idea. The SPKL video presentation
turned out to be a powerful tool for investors, so look for more video
content this year as I know a good thing when I see it.
Want to hear about something very
exciting for microcap investors? No one else seems to recognize the significance
of what's happening in the regulatory world. I haven't read anything about
the new reg changes in the main stream media. New regs are here, and they
should be very favorable for microcap investors.
Let's set the stage. Companies go
pubic for two reasons- 1. Access to capital, and 2. an exit strategy for
founders and a way to enhance employee compensation.
Small companies need capital
to expand, and there are a dearth of hedge funds in the business
of financing small companies. Thanks to 10 years of loopholes in the regulations,
capital has been too easy to get, and free trading shares too easy to issue.
For many years there has been a big
and pervasive problem in the microcap world: Excess supplies of stock from
financiers who engage in "no risk" financings depressing stock prices.
How can a financing be no risk? Glad you asked: Here's how- by creating
securities- i.e. convertible debt and preferred issues, that convert at
a discount to the market, no matter how low the market goes.
Until the Reg S loophole closed about
five years ago, companies were able to issue unlimited quantities of free
trading shares to "foreign entities" who were exempt from registration.
This allowed small companies to engage in highly toxic financings and led
to many abuses in illegal short selling.
In the last five years "death spiral"
financings have become popular. Companies would engage in the issuance
of convertible securities with floorless conversion features. The companies
would then go ahead and register hundreds of millions of unissued shares
on behalf of their financiers. Once registered, many financiers were very
aggressive on the sell side with little regard for market value, because
it simply didn't matter to them. In this high risk business, repatriating
the capital is all that matters. Hedge fund managers live and die
by their monthly returns.
One year ago the SEC finally
did something about the problem. Rule 415- a loosely defined
new regulation started being enforced by the SEC. Under this new
rule microcap companies were only allowed to register 30% of the number
of shares owned by non affiliates and the public. Another words, if a company
had 50 million shares I&O, and 25 million were owned by founders and
insiders, the company could only register up to 7.5 million shares (30%
of the remaining 25 million).
Rule 415 solved the problem
of massive excess supplies, but in doing so created another problem- access
to capital. Financiers, formally willing to finance micros on a relatively
risk free basis, were now forced to take on very substantial risk. Hence,
the supply of capital to small companies became more scarce.
Here's where the SEC stepped
up and implemented some new rules that are favorable to micros. They changed
a number of the requirements under Rule 144 as a kind of "give back"
for what they took away with Rule 415.
Previously, newly issued and unregistered
shares were eligible to be resold into the public markets after 1
year under Rule 144 with one major restriction- the number
of shares that could be sold every 90 days under Rule 144 was limited to
1%
of the I&O every 90 days for any one shareholder.
Under the newly implemented Rule
144 requirements, shareholders are eligible to sell under Rule 144 after
six months instead of one whole year, and the 1% collar has been
lifted. These new Regs go into effect on February 15th.
Here's the net result of all these
reg changes in my view as it relates to open market investors:
-
Financiers will have to be willing
to take more risk in micros under the current regs.
-
Fewer companies will be able to obtain
financings
-
The ones that do get financed will
have a higher probability of success
-
There will be lower failure rates
amongst the good micros that are able to obtain capital
-
Net Result: Fewer stocks to choose
from, more winners, less losers. Eventually, more investors chasing fewer
ideas, and better ideas.
In the 20 years I have been involved
in the microcap world, this is the first major regulatory change implemented
by the SEC that I feel is great for microcap investors.
This is all really good stuff for
microcap stocks, and bodes very well for the future of this end of the
market. This is not to say there won't still be losers in the microcap
world- there will be, and you need to accept the inevitable if you are
going to invest in this end of the market.
Barring a rough road in the overall
markets, new reg changes from the SEC, for the first time in my
experience, should yield better profits for microcap investors.
Now, if we could just get rid of
Sarbanes
Oxley- I can't blame that one on the SEC- Congress, wanting
to appear like it was doing something to protect investors in the post
Enron Era, hung that regulatory mess on public companies. Repealing the
SarBox
mess would be heaven sent for bottom line profits and an oppressive regulatory
system. All Sarbox has done is turn the auditing firms into legalized
extortionists.
We can only hope. I'll take what
we got this year, and be happy for it.
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